Colombian Government to Cut Spending by more than $1.6 Billion USD in 2018 to Reduce Deficit, Says Finance Minister

With oil prices struggling to maintain a rally and Colombia’s economy continuing to underperform projections, the nation’s finance minister announced that there will be major cuts in the 2018 federal budget that he will soon submit to Congress.

Finance Minister Mauricio Cárdenas, in an interview with Bogotá newspaper El Tiempo, said that the budget proposal will come in 5 trillion pesos (more than $1.6 billion USD) below the current level in real terms, a reduction that represents 0.5% of GDP.

The finance minister said that the primary objectives of the spending cuts are to stick to the country’s fiscal rule, reduce the deficit, and maintain Colombia’s investment-grade credit rating. “We continue with the austerity policy,” Cárdenas told El Tiempo this weekend. “We will continue to reduce spending with the objective of hitting fiscal targets and reinforcing our country’s BBB rating.”

Scope of Colombia’s Spending Cuts

In exact figures, the new budget proposal is expected to contain 181.7 trillion pesos of expenditures, not including the cost of servicing the country’s debt. This is down from 182.1 trillion pesos in the 2017 budget. Cárdenas said that the Ministry of Finance is planning to finalize the document and submit it to Congress before the end of July.

He says that the cuts, which require a “great effort on all fronts,” will come in part from a public hiring freeze, public employee salary increases of no more than 1% above inflation, fewer service delivery contracts, and an across-the-board administrative spending reduction on everything from advertising and travel to stationary and gas purchases. “Everything has to continue being reduced,” Cárdenas told El Tiempo.

Photo: Mauricio Cárdenas, finance minister of Colombia, says that “everything has to continue being reduced.” (Credit: Banco de la República / Juan Enrique Rodríguez)

In the first quarter of 2017, Colombia’s GDP grew by just 1.1%. This was below both the calendar-year 2016 growth (2.0%), the fourth quarter year-over-year results (1.6%), and the first quarter of 2016 year-over-year results (2.6%).

Colombia’s central bank has continually cut its key interest rate throughout the year in an attempt to encourage more economic expansion. Despite these efforts, after its last meeting, the central bank said that it lowered the interest rate by another 50 basis points to 5.75% due to the “weakness of economic activity.” It added that the annual “growth rate is likely to post below the current projection.”

Pressure on Colombia’s Credit Rating

In a recently published assessment, New York-based rating agency Fitch Ratings warned that Colombia’s BBB credit rating, which is two notches above junk, could be jeopardized if economic growth continues to underperform expectations at the same time that high fiscal deficits prevent the government from lowering its overall debt burden.

Fitch raised its projection of Colombia’s fiscal deficit to reach 3.1% of GDP next year. This is an increase from its earlier forecast of 2.7% and a revision that highlights “risks of fiscal slippage,” according to the agency. The government has previously set a target or reaching a fiscal deficit rate of 2.2% by 2019, something that Fitch characterized as “ambitious without additional tax revenue measures.”

Though the formal documentation does contain wiggle room in the case of a severe macro-economic crisis, Colombia’s fiscal rule, established with congressional approval in June 2011, calls for a gradual reduction in the nation’s deficit that aims to represent just 1% of GDP effective in 2022.

Colombia to Obey the Fiscal Rule

Despite the massive drop in government revenues since the price of oil dropped by half beginning in late 2014, Cárdenas has continually pledged that the government will continue to adhere by its fiscal rule.

“Although there have been rumors that we will relax the fiscal rule, we are totally committed to it,” Cárdenas told FDI Intelligence late last year.

At the time, the minister added that the fiscal rule has given the government credibility and created trust in the nation as an investment destination. “If Colombia has been able to handle it during a war,” Cárdenas told FDI Intelligence last year, “we must do so during an environment of peace.”